Something Old, Something New

it shoots up. There tends to be some boom and bust around that, centered around investor psychology of both greed and fear.

B.E.: Do you think those fears are overblown?

POTTRUCK: No, I wouldn’t say that. I see that we’ve had some real greed, some real excesses, in the Internet [sector], for example. The valuations on some Internet companies, which are now down 50%, 60% or 70%, [were] not justifiable. And even though these companies have some fantastic business prospects, it’s kind of hard to understand [why there are] multibillion-dollar valuations for companies with $10 million and $20 million in revenues and no prospects for profits as far as the eye can see. Some of that has to work itself out. And the good news is that we’ve seen a 50% to 60% correction already in the Internet [sector] from April to August, and that has not resulted in some huge, horrible crash in the market.

B.E.: If your portfolio was made up of primarily [Internet] stocks, then it’s been a bear market for you?

POTTRUCK: Yes, very much a bear market for you. Now, when people ask us about investing at Schwab, we take a very thoughtful, long-term view. Our recommendations to our clients are always around asset allocation that matches your tolerance for risk. We’re great believers in index funds and broad diversification. So clients who have used the recommendations of Schwab have done very, very well up until this time frame. Now that’s only a [small] percentage of Schwab’s customers. The vast majority are self-directed customers who do their own research and follow their own instincts, and some of them have done well, and some of them in some cases have not done so well.

B.E.: Because a number of self-directed investors may have been feeling some pain in the market because of Internet stocks has Schwab had to do a lot more hand-holding?

POTTRUCK: Well, sure. We have done a lot of hand-holding. The truth of the matter is we did a fair amount of hand-holding upfront. One of the things we did [was] not allow as much margin lending on Internet stocks, which is where people really get hurt. Where people really get hurt is when they borrow. They leverage up their positions, and then when the markets come down, they [get] a margin call and they either have to come up with the cash or sell out their stocks [at a low price]. That’s not a place you want to be.

So we raised our margin requirements on some of these very risky stocks. Normally, we would lend up to 60% to 65%. Now we’re only lending, in some cases, 30% to 50%. So there are much more restrictive margin requirements. And some of our customers didn’t like that. They thought we were being too restrictive and may have taken their business elsewhere. We thought it was prudent. We started doing this in the first quarter of 1999.